Impact of Brexit on Buying and Selling of Property

The Brexit Referendum has caused lot of controversy in the property market. From the Treasury to the International Monetary Fund, forecasters are making big assumptions concerning what might or might not ensue, the most popular being that property prices will slump.

Another argument is that because Brexit will gradually weaken investment into new properties and supress immigration of valuable skilled workers into the construction industry, the UK may not experience the much awaited recovery from the scarcity of housing currently in the country. Less supply could mean prices stabilise. At the moment the dynamic is complex.

What could the extent of the price fall be?

There’s no one particular figure.

For instance, Chancellor Osborn predicted that Brexit could cause a 10pc to 18pc drop in house prices by 2018. According to the Treasury, the calculation used in Chancellor Osborn’s prediction is based on the current market and not relative to 2018.

If you factor that information in, then an 8pc drop in prices would be the worst the U.K. property market can expect in real terms.

Fitch Ratings, on the other hand, stipulated that the property market could experience a 25pc plummet, backing the conjecture up with the possibility of sterling falling in value by a third against many currencies in 2016. Fitch Ratings also argued that such a development would return property prices to a more reasonable, sustainable level.

The Centre for Economics and Business Research reported that Brexit could, by 2018, bring the overall worth of U.K. housing down to by £26.5bn.

Why House Prices Would Fall

The International Monetary Fund warned that Brexit can result in a decline in equity and property prices, a rise in the costs of borrowing, and even a halt in the stream of investment into industries like the financial market and real estate.

This means that, with the instability brought by the move to leave the European Union, most property buyers would decide to sit back and watch to understand how the market would fare before attempting any investment in the property market.

This reduction in the amount of dealings in the property market would lead to a decline in the demand for properties, which would in turn cause property prices to drop.

Also, governor of the Bank of England, Mark Carney, warned that the move to exit the E.U. would lead to a technical recession and that there could be a resultant increase in mortgage cost, even if the Bank reduced interest rate in order to increase demand.

Couple the recession with the possibility that banks would refuse to lend and the result would be a decrease in demand for properties. Thus prices will fall.

Which Sector and Part of the Country Will Feel the Impact the Most?

Some analysts believe that London will be hit the hardest, since it’s an unstable property market and is more liable to outside blows. They also believe that properties whose values exceed £1m will experience the most effect, since 49pc of such properties are owned by non-U.K. investors.

Generally, the UK can expect the number of properties bought and sold to drop by 5pc to 10pc in the next two years due to Brexit. However, when one considers that last year’s number of property dealings dropped by 7pc because of price and poor foreign demand, it becomes clear that the projected figures aren’t new to London.

But then, a decline in the value of the pound may translate to interest from foreign investors, since their money thus can buy more in the U.K. Hence, London could become a more enticing property market for these investors, despite possible tougher immigration laws due to Brexit.

What Will This Mean for First-Time Buyers?

If because of Brexit London loses its charm as a choice residential city, the demand and hence competition for housing would fall. This would also be the case if the move to leave the European Union curbs immigration. House price inflation would decelerate along with rental growth.

However, young people stand to be affected the most, should Brexit result in the speculated recession, loss of jobs, and constrained mortgage lending. Hence, a fall in prices would not necessarily imply an improvement in affordability.

What Happens to the Prices of Rent?

In the event that a lot of the non-citizens residing in the U.K. have to retire from the country because of harsher immigration laws, rental properties would become less competitive. All things being equal, this would result in a fall in rent prices.

Since around 37pc of Londoners are immigrants and about 11pc of those immigrants are from the European Union, London would be the most affected. When one now considers that immigrants, according to the Migration Observatory, are thrice more prone to renting their homes than U.K. citizens, the dilemma that London would be in begins to reveal itself.

The demand for rented property for students may also fall as a result of Brexit. This is because there are about 125,000 students from the European Union studying in U.K. universities, and tougher immigration laws would cut down that number; hence the decline in the demand for rented student homes.

In this case, cities like Manchester, Nottingham, and Birmingham with large populations of students will be affected the most.

This could all result in a catastrophe in the supply of rental properties, since lower demand for rented homes and lower rents would not only make the buying of rental properties unattractive, but also make mortgage repayments tough.

Additionally, it does not seem like Brexit is going to resolve the crisis, even if the prices of property should drop. This is because tougher immigration laws due to Brexit could lead to a reduction in capable constructions workers.